Palestinians on Financial Brink, Envoy Warns

By Scott Wilson
Washington Post Foreign Service
Tuesday, February 28, 2006

JERUSALEM, Feb. 27 -- A special Middle East envoy, James D. Wolfensohn, has warned international donors that the Palestinian Authority could collapse within two weeks unless fresh funding can be found to pay salaries, clear overdue energy bills and sustain government services financed largely by foreign aid.

In a letter Saturday to senior diplomats from the group of peace interlocutors known as the quartet -- Russia, the United States, the European Union and the United Nations -- Wolfensohn said Israel's decision to withhold revenue from the sales tax and customs fees it collects for the Palestinian Authority had pushed the caretaker government to the brink of insolvency.

Palestinian leader Mahmoud Abbas's secular Fatah movement currently runs the government. But that will change in a few weeks when Hamas, designated a terrorist organization by the United States and the E.U., forms the next cabinet. Hamas scored an unexpected victory in parliamentary elections Jan. 25.

Wolfensohn, a former World Bank president and the quartet's envoy to the Middle East, said the Palestinian Authority needed $60 million to $80 million by this week to pay 150,000 civil service employees and trainees, nearly half of them in the security forces. The European Commission, the E.U.'s executive body, agreed Monday to provide $144 million to the Palestinian Authority, designating most of it for social programs and energy bills. About $20 million could be used for salaries.

"If we do not want to see rising tension leading to violence and chaos -- particularly just before the Israeli election -- we will have to develop urgently a convincing strategy addressing the PA's financial and developmental needs, not only in the short-term of the next few weeks but also in a longer time frame," Wolfensohn wrote in the letter, a copy of which was provided to The Washington Post. Israel has scheduled elections for March 28.

Wolfensohn proposed a donor meeting in mid-March to seek ways of financing the Palestinian government without violating anti-terrorism laws that prohibit funds from being sent to Hamas, which refuses to recognize Israel.

"If we don't get this right, I am afraid past investment in the Palestinian development will be lost, a Palestinian economy will not be sustainable, the Palestinian people will live off humanitarian handouts, and security for both Palestinians and Israelis will be in greater jeopardy than it has been for years," Wolfensohn wrote.

The quartet agreed Jan. 30 to continue financing the caretaker government in order to strengthen Abbas, who has called on Hamas to pursue a negotiated peace with Israel based on a two-state solution. But Wolfensohn warned that Israel and the United States were pursuing policies at odds with that position by restricting vital funding before Hamas installed its cabinet.

The quartet has demanded that Hamas renounce violence, recognize the Jewish state and abide by previous Fatah-backed agreements or lose foreign aid that accounts for a large portion of the Palestinian Authority's roughly $2 billion annual budget. Hamas leaders have declined to do so, although they have said they would consider a long-term truce with Israel if it withdraws from all territory occupied in the 1967 Middle East war, including East Jerusalem.

The Israeli government decided this month to freeze a $55 million monthly tax and customs transfer to the Palestinian Authority. The payment covers about half of the authority's monthly payroll and unemployment benefit costs.

In his letter, Wolfensohn said the Palestinian Authority was facing a $260 million budget deficit "over the expected remaining lifespan of the caretaker government mainly because of Israel's decision to withhold tax and customs revenue transfers of up to $130 million." A decision by President Bush to seek the return of $50 million in direct U.S. aid would increase the deficit, he wrote.

Wolfensohn said Palestinian officials had identified funding to cover about half the deficit, and he confirmed Saudi Arabia's intention to contribute $20 million by the end of this month. Russia and Norway are also preparing plans to donate $10 million each, he said. But he warned that those measures would not resolve the Palestinian Authority's long-term fiscal problems.

The envoy also said that Israel might "wish to consider ways in which it maintains its decision not to support Hamas but find an alternative route" to make monthly transfer payments to the Palestinians, an arrangement established by the 1993 Oslo accords. He suggested that Israel could use the frozen funds to pay Palestinian fuel bills owed to private Israeli companies, which come to roughly $60 million a month.

Benita Ferrero-Waldner, the E.U.'s external relations commissioner, said the funds approved Monday would "reduce the pressure on the caretaker government so that President Abbas can continue his important task of building the next government."

Jihad al-Wazir, the acting Palestinian finance minister, said that because all but $20 million of the European aid was earmarked for humanitarian projects and utility bills, it would help the government only slightly with its most pressing problem of paying salaries. "It will help the Israeli companies receive payment for energy bills," Wazir said. "But it really doesn't help with our immediate crisis."

In recent public comments, U.S. diplomats have indicated that Abbas could serve as a conduit for funding, even though that policy would contradict past U.S. efforts to weaken the Palestinian presidency when it was held by Yasser Arafat. U.S. development aid to the Palestinian territories last year exceeded $400 million, all of it channeled through nongovernmental organizations.

The Israeli government, however, has sought to discourage the use of Abbas as a conduit.

"It appears that the real political power will be held by Hamas, and Israel does not believe it would be in anyone's best interest to ignore that," said Mark Regev, the Israeli Foreign Ministry spokesman. "To put it in Jewish terms, we would be very worried that Abu Mazen could be used as a way of making the Palestinian Authority kosher," he said, using Abbas's nickname.

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